The Internal Revenue Service has been in the news lately, and not for the normal reasons.  The IRS has been called out for using its power in the wrong ways to monitor non-profit organizations, making poor choices on spending money to train employees, and for other questionable practices.

Beyond this internal strife, there is news coming out of the IRS which we should all pay attention to because it has meaning to each of us.

TAX RETURN INFO DISCLOSURE RULES RELATED TO THE HEALTH CARE LAW

Information pertinent to determining an individual’s eligibility for buying health insurance coverage under the Affordable Care Act will be shared by IRS with the Department of Health and Human Services.  The information to be shared is further characterized as “tax return information”.  The information will be used by the health insurance exchanges (such as Cover Oregon).  IRS section 6103(1)(21) authorizes disclosure (sharing) of the following data:

  • Taxpayer identity
  • Filing status
  • Number of dependents
  • Modified adjusted gross income
  • Tax year
  • Social security benefits reported as income

WORKERS CLASSIFICATION ISSUES

The IRS is devoting significant audit resources to this situation.  There are 6,000 random audits in process during 2011-2013.  The question centers around the issue of employee or independent contractor.

There is IRS guidance and court decisions to provide a reasonable basis for making the classification call.  Watch for results from the 6,000 audits in 2014.  Health reform will play a role in this situation as well.  After 2014, companies with at least 50 full-time employees must offer a reasonable level of affordable health insurance or face penalties.  Classification of workers will be key.

ID THEFT USING YOUR TAX RETURN

At least ten years ago we started filing tax returns electronically for clients (after obtaining their authorization).  Initially, this service was seen as a convenience.  Clients no longer had to take their paper tax returns to the post office to get them mailed.  Electronic filing has grown to be so much more.  The system now serves a part in the IRS monitoring of ID theft.  When a return is filed electronically there are numerous data items checked and the return has to get through all of these filters or else it is rejected. The IRS then sends a notice to the preparer about the issues to resolve regarding a particular data item in the return.  Occasionally the problem encountered is that a return has already been filed for one or more of the ID numbers shown on the return (taxpayer, spouse, or dependents).  This could be as simple as a misunderstanding between college age kids and parents about who is claiming the kids as a dependent.  However, the more serious situation involves a taxpayer’s stolen Social Security number used to file a tax return and claim a fraudulent refund.  Of course, this filing is probably done the old fashioned way; using paper.  When the legitimate taxpayer tries to file their return the IRS rejects it.

For both 2012 and 2013 identity theft has topped the IRS annual list of tax scams.  The IRS suggests the following precautionary actions:

  • File tax returns early to beat the thief
  • Protect social security numbers (your own as well as dependents)
  • Safeguard internet passwords
  • When discarding important documents, do so by shredding
  • Check credit reports annually
  • Safeguard mail
  • Install firewalls and antivirus protection on personal computers

If you believe someone has acted fraudulently with respect to your tax account notify the IRS immediately.  IRS Form 14039 can be used to report ID theft.

2011 INDIVIDUAL INCOME TAX RETURN STATISTICS

U.S. taxpayers filed more than 1.4 million more individual tax returns for 2011 than for 2010.  In total, 145.4 million individual returns were filed.  In last month’s article I wrote about the new taxes and their various thresholds.  Looking at the IRS statistics about 2011 tax returns filed I note that about 4.7 million or 3 percent reported adjusted gross income (AGI) in excess of $200,000.  It is interesting to note that 65.5 percent of returns filed reported AGI of $50,000 or less and 31.4 percent of returns filed reported AGI between $50,000 and $200,000.  In total AGI rose 3.5 percent over 2010.

THE MISSION OF THE IRS

The real crisis facing the IRS is not the recent bad publicity, it is the changing face of its mission and inadequate funding to accomplish the expanded mandates.  The IRS budget has been reduced 8 percent over the past three years while they are now on the verge of administering the wave of new taxes and the ever expanding burden of healthcare reform rules.  At the same time, they are trying to sort out their failed attempt to provide oversight and regulation of tax preparers through a Registered Tax Return Preparer program.  Stay tuned for more court and legal proceedings on this matter.

PLANNING, PLANNING, PLANNING

2013 provides many opportunities for tax planning.  Be sure to have a mid-year contact with your CPA to minimize surprises in the first quarter of 2014 while filing your 2013 tax return.